• OCC, China Exim Bank done, ISB holders yet to be convinced; opposition to MLB targets 
• Some restrictions on availability of credit will be resolved with improved credit rating 

On Wednesday (26), Sri Lanka signed agreements with China’s Exim Bank and the Official Creditor Committee (OCC), which includes the Paris Club and India, to restructure about $ 10 billion in bilateral debt.

This is one of the major milestones of a long debt restructuring process which has lasted for over two-and-a-half years, with the country now in the last stages of completing the process.

However, Sri Lanka still needs to convince bondholders to restructure about $ 12.5 billion in International Sovereign Bonds (ISBs).

Addressing the nation on Wednesday, President Ranil Wickremesinghe said that Sri Lanka had reached a final agreement with official bilateral creditors and China’s Exim Bank that day and that, with these agreements, the country would be able to defer all bilateral loan instalment payments until 2028.

Furthermore, he said that Sri Lanka would have the opportunity to repay all the loans on concessional terms, with an extended period until 2043.

“Our next objective is to reach an agreement with commercial creditors, which includes ISB holders. By continuing on our current path, we are confident that we can achieve this agreement, and discussions are ongoing,” he said.

Moreover, he said that there were legal opportunities for the bilateral creditor nations to resume all projects which were funded by them, which had come to a standstill after the country declared bankruptcy in April 2022.

Wickremesinghe added that there was now room for the recommencement of projects such as the development of the Bandaranaike International Airport, the Light Rail Transit project, and the expressway projects. 

The President also said that international confidence in Sri Lanka had been reaffirmed as bilateral creditors had reached an agreement with the island nation, serving as a form of international endorsement. 

“The global community, which previously refused to accept our letters of credit, is now prepared to grant us a certificate of confidence,” he said.

IMF satisfied 

In a statement on Thursday (27), the International Monetary Fund (IMF) said that Sri Lanka’s agreements with China and other creditor nations to restructure about $ 10 billion in bilateral debt had taken the island nation a step closer towards restoring debt sustainability.

“We hope that there will be swift progress on reaching agreements with external private creditors in the near future,” IMF Senior Mission Chief for Sri Lanka Peter Breuer said in a statement.

Opposition welcomes bilateral deal; opposes bondholders’ deal

Speaking to the media on Thursday (27), Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva said that the agreement with the official creditors and China on debt treatment was not merely a result of the work of the advisors and the authorities, but also due to the relationship that existed between Sri Lanka and countries such as India, Japan, and China over the past decades, regardless of the political party in power.

He said that SJB was waiting to see the details of the agreement in Parliament in the coming week, especially details such as how long the debt repayment had been pushed to or the grace period, whether Sri Lanka would have to pay interest during the grace period, and the interest rate at which the payments should be made until 2043.

Moreover, he said that the SJB did not agree with the claim that Domestic Debt Optimisation (DDO) had been successful, because Sri Lanka was the only country that had avoided banks and individual creditors and put the entire burden on the pension funds.

“While welcoming the success of the discussion held with the bilateral creditors, we are strongly against the ongoing talks with the bondholders because the proposal presented by the ISB holders is very adverse to the country,” he said.

He added that the Opposition would oppose an agreement between the authorities and the ISB holders to restructure debt based on the Macro-Linked Bond (MLB) proposal.

Further, de Silva said that a country could not be bankrupt like an individual or business as its resources could not be valued as in the case of a company or of an individual. “We cannot call this bankruptcy, but rather the inability to pay the debt sustainably,” he said.

He said that Sri Lanka needed to move from the default rating the country was currently at to at least CCC+, noting however that this would only happen after the completion of commercial debt restructuring.

“If the authorities are going to agree with the ISB holders to restructure debt by pushing the payment period to the 2040s, then it should happen in a manner that is positive to the country,” the MP said.

SJB opposes proposed MLB targets 

Speaking on the MLB terms presented by the bondholders, he said that according to the IMF staff report released after the completion of the second review, Sri Lanka’s GDP was expected to be at Rs. 40 trillion by 2027.

“But the proposal by bondholders says that Sri Lanka’s GDP should be measured in US Dollars and, based on their targets, the haircut will be decided if the GDP performance is above or below the targeted GDP in the respective year.”

He noted that the expected haircut of 28% for the new bonds would be implemented after 2028 and the entire 28% of the haircut would be applied if Sri Lanka’s GDP was at $ 84.2 billion in 2027.

De Silva added that if Sri Lanka’s GDP performance was higher than what had been indicated by the bondholders, then the haircut would gradually decrease accordingly. “So by 2027, if the GDP is above $ 96 billion, then the haircut will reduce from 28% to 7.3%,” he said.

According to the calculations done by the SJB on the expected GDP of Sri Lanka by 2027 in USD terms, if the exchange rate depreciates by 5% annually, by 2027 the USD will be at Rs. 365; then, according to the IMF projection of Rs. 40 trillion, Sri Lanka’s GDP will be at $ 109 billion by 2027.

If the rupee depreciates by 7% annually, then the USD will be at Rs. 385 by 2027 and GDP will be at $ 103 billion; similarly, if it depreciates by 10%, then the dollar will be at Rs. 419 and GDP will be at $ 96 billion.

“So no matter which way the rupee depreciates – by 5%, 7%, or 10% annually – the haircut will reduce from 28% to 7.3%,” he said, as the GDP was well above the target.

MLB offers a win-win for everyone 

According to the UK-based investment firm abrdn, the IMF is assessing whether the MLB complies with the Debt Sustainability Analysis (DSA) parameters and is yet to sign off on the deal.

One of the members involved in the debt negotiations between bondholders and Sri Lankan authorities has said that MLB was “complex,” which could explain why the IMF is yet to comment on the revised MLB.

“Critics often oppose adding contingent instruments to debt restructurings. However, we think these are a ‘win-win’ solution. They improve the country’s capacity to service debt when it meets the payout trigger and reduce the losses that most investors suffered as a result of the default. The instruments can also expedite a restructuring agreement, enhancing capital flows into the country,” the investment firm said.

It further said that, as with Ghana, Sri Lanka was allegedly close to a deal with its Eurobond creditors. One potential fly in the ointment is October’s Presidential Elections. In the interim, all eyes will be on the IMF.

SL needs to get bigger relief from bondholders than bilaterals 

Speaking to TV Derana on Thursday, independent think tank Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando said that Sri Lanka needed to get relief that would be felt by restructuring the ISBs as this was bigger than the bilateral debt.

According to him, the value of the project loans received by Sri Lanka is at $ 22 billion, out of which $ 10 billion is bilateral debt while the rest belongs to multilateral agencies. “No creditors like to give more relief than others and the relief should be comparable to what is offered by others,” he said.

He added that the announcement of the bilateral debt agreement may have come based on some sort of agreement between the bilateral creditors and the bondholders to share debt relief equally, noting that both parties needed to reach an understanding among themselves. 

‘Country is out of bankruptcy’ is a political statement 

Speaking to The Sunday Morning, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe said that it was fair to say that Sri Lanka was bankrupt and that claiming it was ‘out of bankruptcy’ was a political statement.

He said that what was usually looked at was whether the country’s credit rating was in default or not. “It is usually given to the country’s commercial debt, which is the ISBs – yet to be restructured.”

He noted that even the restructuring of bilateral debt had not been completed yet: “What has been done is that the parties have finalised the MoU, which still needs to be implemented after some administrative work. The next step will be to have an agreement in principle with the bondholders and the China Development Bank and from that to finalise an MoU. It is only at that point that the country’s credit rating will move from default rating to non-default status,” he said. 

Moreover, he said that the maturity extension from 2028 to 2043 and the interest rate reduction were generally expected from the bilateral debt restructuring.

Risk of dragging debt talks beyond election is sentiment, not economic

Damsinghe said that the window to finalise an agreement with the bondholders was limited due to the upcoming election: “If the authorities can get into the agreement in principle within the month, then the comparability of treatment can be done, followed by moving quickly to finalise the deal.”

He said that the notion of bilateral creditors agreeing to restructure debt implying that the creditors had some understanding about the debt treatment with the bondholders was untrue. “The sequence in which the current debt restructuring negotiations work is that the bilaterals agree first before the bondholders. That’s why the OCC has put out a statement that it wants comparable treatment in the rest of the debt restructuring process.”

For example, he said that in Zambia, it took about 4-5 months to agree on a deal with the bondholders after agreeing on a deal with bilateral creditors.

The OCC statement said that it was looking forward to receiving all information necessary for it to ensure comparability of treatment and that it expected the Sri Lankan authorities to continue to engage with its private creditors to find, as soon as possible, an agreement on terms at least as favourable as the terms offered by the OCC.

“These engagements will ensure that the overall debt treatment granted to Sri Lanka is consistent with the IMF programme parameters,” the OCC added.

Meanwhile, Damsinghe said that the risk of dragging the debt restructuring beyond the October elections was more of a sentiment problem rather than an actual economic problem, explaining: “Sri Lanka doesn’t have a credit rating currently and the economy is functioning better than it did in 2022. Continuing at the current status is automatically significantly worse.”

He said that the sentiment would then impact how interest rates, exchange rates, and inflation moved.

Int’l transactions of banks have improved despite default rating 

Speaking to The Sunday Morning, CT CLSA Securities Head of Research Oshadha de Vas Gunasekara said although Sri Lanka’s credit rating was technically at Selective Default, domestic banking system transactions with the international market had improved given the sufficient foreign exchange liquidity.

“I think there are still restrictions in terms of availability of credit when you open a Letter of Credit since we are in the default status, but things have improved,” he said. 

He added that things would return to a more normal status when the external debt restructuring was finalised and the credit rating was upgraded from default status.